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Improving Efficiency
The new high ground for banks
Foreword
The turmoil in the financial markets, coupled with the economic downturn, is fundamentally altering
the financial services environment. In this new world, improving operating efficiency has become a
competitive necessity. But while financial firms have typically moved quickly to reduce costs when the
business cycle is contracting, far too often these efforts have been quickly forgotten when business
picks back up.
In this report, we present research conducted by the Deloitte Center for Banking Solutions
demonstrating the critical importance of operating efficiency to the fortunes of financial firms. Among the findings is that
building efficient operations is not enough steady, continuous improvement in operating efficiency are required. In fact,
banks that have achieved continuous improvements in efficiency have also generally experienced far greater gains in their
share prices.
The report also describes the key factors that drive success. While there are many factors, a few themes underpin them.
Successful programs are sustained, long-term efforts, not something that is here today and gone tomorrow. These efforts
should be comprehensive, encompassing such issues as awareness, business processes, metrics, technology, and culture.
Finally, most organizations will find that increasing efficiency over the long term will demand fundamental changes to their
business processes and often to their culture as well. Driving this level of change depends upon active leadership from the
C-suite to infuse a commitment to continuous efficiency improvement into the DNA of the organization.
We hope you find this report worthwhile.
Sincerely,
Don Ogilvie
Independent Chairman
Deloitte Center for Banking Solutions
May 2009
As used in this document, Deloitte means Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
Improving Efficiency
The new high ground for banks
Executive summary
Improving Efficiency
The new high ground for banks
D. Continuing
Consolidation
Improving Efficiency
The new high ground for banks
Market performance
(indexed
to 100)
Exhibit
2: A significant
decline
in stock price performance
120
100
80
60
40
20
0
01
02
03
04
05
06
07
08
09
10
11
12
01
02
03
04
05
2007
06
07
2008
08
09
10
11
12
01
02
03
2009
Improving Efficiency
The new high ground for banks
200%
150%
100%
50%
0%
2000
2001
U.S.
Europe
2002
2003
2004
2005
2006
2007
2008E
2009E
Asia-Pacific
Improving Efficiency
The new high ground for banks
6000
1,050,000.0
5000
$ Millions
900,000.0
4000
Number of transactions
1,200,000.0
750,000.0
600,000.0
3000
Japan
450,000.0
2000
300,000.0
Europe
Asia
1000
Americas
150,000.0
Africa and Middle East
Total Deals
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Improving Efficiency
The new high ground for banks
2002
2003
2004
2005
2006
2007
2008
* The standard FDIC definition of the efficiency ratio has been used throughout ,which equals operating expenses divided by the sum of
noninterest income and net interest income.
Improving Efficiency
The new high ground for banks
60.0
55.0
50.0
45.0
40.0
35.0
2000
2001
2002
2003
2004
2005
2006
2007
Q308
Source: Capital IQ
% 68
200.0
180.0
160.0
140.0
66
Minimum
Maximum
Average
120.0
64
62
Gap
between
most and
least
efficient is
widening
100.0
80.0
60.0
40.0
60
58
56
54
52
20.0
50
2000
Europe
2001
2002
2003
2004
2005
2006
2007
2008
Asia
Source: Capital IQ
Improving Efficiency
The new high ground for banks
Exhibit 8: Average growth in revenue and expenses groups 1, 2, and 3 (2002 2007)
140,000.00
70,000.00
250,000.00
60,000.00
120,000.00
200,000.00
50,000.00
100,000.00
150,000.00
80,000.00
60,000.00
40,000.00
30,000.00
100,000.00
20,000.00
40,000.00
50,000.00
20,000.00
0
0
2002 2003 2004 2005 2006 2007
10
10,000.00
Improving Efficiency
The new high ground for banks
Exhibit 9: Wall Street rewards U.S. companies that maintain cost efficiency
Analysis of 30 U.S. banks 2000 - 2006 1,2
300.0%
Group One
Group Two
Group Three
Bubble Size =
Market
Capitalization
250.0%
200.0%
150.0%
100.0%
50.0%
Efficiency Ratio Improvement
-50.00%
-40.00%
0.0%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
-50.0%
-100.0%
1 The group of 30 banks studied were selected on the basis of a random sample of small, medium, and large banks. The banks have been organized on the
basis of efficiency ratio improvement and then organized into equal groups of three.
2 Banks whose bubble are covered: (Group 1, 10.37% improvement in efficiency ratio, 21.6% growth in stock price), (Group two, 3.42% improvement in
FYE 2000
Q3 2008
10
0
-10
-20
-30
Deteriorating
or Unchanged
Efficiency
Improving
Efficiency
-40
-50
-60
-70
11
Improving Efficiency
The new high ground for banks
300
200
190
150
100
50
0
Group One
Group Two
Group Three
Source:
Source:
FDICFDIC
250
250
Improving Efficiency
The new high ground for banks
Awareness
Short-term approach.
Headcount, travel, and
entertainment expenses focus.
Limited understanding of the
detailed costs of running the
business.
Accountability/
Organization
Process and
Controls
Measurement
Technology
Culture
13
Improving Efficiency
The new high ground for banks
An enterprise-wide perspective
Sustained cost management: Sustained costmanagement strategies span industry cycles and attempt
to make efficiencies permanent. Goals are aligned to
the core vision of the enterprise. Efficiency improvement
is consciously embedded in the DNA of the institution
through an explicit shift toward creating a culture that
recognizes and rewards a rigorous approach to cost
management and performance improvement.
The key element in sustained cost management strategies
is a long-term commitment to efficiency improvement. In
our experience, longer-term cost management programs
are more successful than short-term initiatives. They tend
to have wider internal support and are frequently more
strategic in their scope and intent. With their focus on core
operating model improvements, longer-term programs
typically address the key challenges of the enterprise in a
more sustainable fashion.
Continuous efficiency improvements: This approach
goes beyond long-term cost management and
differentiates the firm in efficiency improvement. This
translates into dealings with customers, in communications
with shareholders and in managing and developing
employees. A commitment to efficiency leadership is also
often reflected in initiatives at an industry level, playing
14
Improving Efficiency
The new high ground for banks
Authors
David Cox
Director of Research
Deloitte Center for Banking Solutions
dcox@deloitte.com
+1 212 436 5805
Paul Legere
Principal
Financial Services
Deloitte Consulting LLP
plegere@deloitte.com
+1 312 486 2289
James Sohigian
Principal
Deloitte Consulting LLP
jsohigian@deloitte.com
+1 312 486 2683
Industry Leadership
Jim Reichbach
Vice Chairman
U.S. Financial Services
Deloitte LLP
jreichbach@deloitte.com
+1 212 436 5730
The Deloitte Center for Banking Solutions provides insight and strategies to solve
complex issues that affect the competitiveness of banks operating in the United
States. These issues are often not resolved in day-to-day commercial transactions.
They require multidimensional solutions from a combination of business disciplines
to provide actionable strategies that will dramatically alter business performance. The
Center focuses on three core themes: public policy, operational excellence,
and growth.
To learn more about the Deloitte Center for Banking Solutions, its projects and events,
please visit www.deloitte.com/us/bankingsolutions. To receive publications produced
by the Center, click on Complimentary Subscriptions.
Laura Breslaw
Executive Director
Deloitte Center for Banking Solutions
Two World Financial Center
New York, NY 10281
lbreslaw@deloitte.com
+1 212 436 5024
Endnotes
Bloomberg WDCI Report 2/25/09.
Ibid.
Ibid.
4
5
6
Observations on Risk Management Practices During the Recent Market Turbulence, The Senior Supervisors Group, March 6, 2008.
Final Report on the IIF Committee on Market Best Practices, IFF, July 17, 2008.
Blueprint for a Modernized Financial Regulatory Structure, U.S. Treasury, March 31, 2008.
10
Navigating the Compliance Labyrinth The Challenge for Banks, Deloitte Center for Banking Solutions, December 2007.
11
FSI deal activity includes banking and finance institutions as defined by Mergerstat. 2008 estimates of M&A Deal activity includes closed or pending deals in the Mergerstat database as
of Apr 27 2008.
12
Cross-border M&A deal activities includes deals where the accquirer and the target are based in different countries Cross-border is inclusive of cross-region activity.
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